Doing Business in Afghanistan

Why Invest in Afghanistan? 

• THREE GOOD REASONS:

1. Afghanistan is a fast growing emerging market of strategic importance close to some of the largest and fastest-growing markets in the world

Afghanistan is strategically located between the energy-rich republics of Central Asia and the major seaports in South Asia providing a key transit route for central Asian oil and gas to markets in South Asia as well as overseas. Also Afghanistan has natural access to markets of neighboring countries including important fast-growing markets such as China, India and Pakistan.

2. Afghanistan offers a pro-business minded environment with legislation favorable to private investments

The principles of a free market economy are incorporated in the new Constitution {art. 10} just as the growth of the private sector is a cornerstone of the National Development Strategy. Co9nsequently the President as well as the Government have focused intensely on removing obstacles to private sector development. 

3. Afghanistan is rich in natural resources

Afghanistan is remarkably rich in mineral resources. There are currently more than 1,400 identified mineral deposits. These include energy minerals such as oil, gas and coal as well as iron and copper deposits of world quality. Furthermore known precious and semi-precious stones in Afghanistan include emerald, jade, amethyst, alabaster, beryl, lapis lazuli, tourmaline, ruby, quartz, and sapphire. Finally great opportunities for investments exist within the hydrocarbons industry.  

Following the national privatization program most of the major state-owned enterprises have been slated for international tender 2006-2008 which has made entry into all these sectors easier. 

Sector opportunities 

Afghanistan offers a wide range of opportunities spanning from construction which as in any post conflict countries has been and continues to be booming, over agribusiness, a fundamental means of livelihood in Afghanistan which has a climate very well suited for horticultural crops, to Energy and Mining. 

Major sector opportunities: 

• Agribusiness and Agro-processing
• Construction and construction materials
• Energy and natural resources
• Textiles and carpets
• Transport and Logistics
• Chemical and pharmaceutical products
• Banking and financial services
• Telecom Services
• Real estate and tourism
• 50 plus state owned enterprises (SOE’s) slated for privatization

Political environment and government priorities 

After years of war Afghanistan is finally open for business. Following the election of H.E. President Hamid Karzai in October 2004 Afghanistan’s first Parliament for more than 30 years held its inaugural session in Kabul in December 2005. Half way through its first year in existence Parliament has approved a fresh line up of Supreme Court justices – a group of professionals and reformers that includes several of Afghanistan’s finest legal minds. The establishment of this court represents a distinct change from the judiciary that has been in place since the collapse of the Taliban and for the first time in its history, Afghanistan is now on its way to have a real system of checks and balances.  

The Afghan Government recognizes that sustained growth of the private sector based on productive investment is an essential prerequisite for economic growth and poverty reduction. The Government recognizes that in order to reach the goals set forth in the National Development Strategy of providing employment opportunities and generate financial resources the private sector plays a crucial role. Afghanistan has already made significant progress in achieving macroeconomic stability and small to medium scale private sector activities have witnessed growth. For a long time activities have, with the exception of the telecommunications industry, predominantly been driven by the international reconstruction effort and donor money because the private sector has been reluctant to undertake medium to long-term productive investments.  

This tendency is however changing and Afghanistan has started to see bigger companies such as Coca-Cola for instance who has opened up a bottling plant adjacent to AISA’s Bagrami Industrial Park next to Kabul; Siemens who is rehabilitating dams; Serena Hotels who has opened Kabul's first five-star hotel; as well as the opening of 14 private banks. In total 15,877  private companies have registered through AISA of which 1,313 are foreign, yielding a total of USD 5.5 billion worth of private investments. 

The President and the Afghan Government both have a strong vision of reform and state building and is working hard towards developing an attractive environment for private investments as well as an effective, honest and transparent public sector. Their commitment to Private Capital Investments is clearly illustrated in Article 10 in the Afghan Constitution: “The State encourages and protects private capital investments and enterprises based on the market economy and guarantees their protection in accordance with the provisions of law.” (Article 10, Afghan Constitution). In practice AISA has been established to streamline the registering process and to offer support for investors on the ground resulting in Afghanistan ranking as number 16th among 145 countries for ease of opening an enterprise according to the World Bank. 

As a result Afghanistan is starting to see extensive both international and domestic private investments including prominent international companies. 

General Information Afghanistan Priority Sectors

1. Agriculture and agriculture-related industries

Agriculture is a fundamental means of livelihood in Afghanistan, generating 50% of the country’s GDP and supporting 85% of its people. The climate of Afghanistan is well suited for the cultivation of horticultural crops and Afghanistan is the geographic origin of many high-end crops like raisins, pomegranates, pistachios and almonds.

There are approximately one million farms in Afghanistan and more than 2,000 wholesalers for horticulture products. Intensive commercial farming increases sustainable economic growth in rural areas, encourages competition, contributes to regional development and helps sustain the growth of private businesses related to it. Investment in agro-business and agro-processing will make a positive impact on the economic development of Afghanistan and will give Afghans pride in producing and purchasing local Afghan products. It should be the goal of a modern agricultural sector for Afghanistan to become self-sufficient again and subsequently be able to expand into an export industry.

One industry related to the agricultural sector is for example packaging which provides great opportunities for investors, as demand for Afghan agricultural goods is high, but current packaging procedures are outdated and damage fresh goods en route to markets and prevents an effective export business for many crops. Some 20-40% of post-harvest horticulture products are wasted because of poor packaging.

Processing is another great investment opportunity. Market potential for processed agricultural products including snack foods, packaged biscuits, fruits concentrates, pickles and fresh fruit jams both in Afghanistan and in the region is enormous.

Domestic production of machinery related to the agro-business and agro-processing industries is a lucrative opportunity for investors given that current equipment in Afghanistan is currently imported from abroad, or date back from the Soviet era. Demand for new machinery, such as grain cleaning and sieving equipment for flour, and tractor trolleys and ploughs, will continue to grow and be vital to the production of agricultural goods. In the long term, the manufacture of local machinery will be profitable to the agricultural industry.

2. Construction materials

Another interesting area of investment is the construction materials industries in order to improve the supply of quality products from within the country. These, if up to international standards, might grow into an export industry and hence have a future that way.

While in the first years of reconstruction it was mainly foreign construction companies who attracted the major construction contracts, it is now the local construction industry which is shaping up to acquire the necessary capacity to take over from their international competitors as they offer a considerable price advantage.

Good quality construction material produced locally will hence be an important and profitable sector to drive the local construction industry.

3. Telecommunication

Core telecommunication service providers supply the Afghan market already in a sufficient manner with increased competition and price pressures. While there are still opportunities for mobile service providers, a far more virgin market represents the supply and service area of the telecommunication sector. Examples are: Data processing, basic business-processing operations information and communication technology (ICT), data transfer, process control and perhaps call centres. These areas are attractive as they do not depend on the overall infrastructure of Afghanistan such as airports and roads but investors can bring and rely on their own infrastructure such as satellite communication equipment etc.

4. Transport and Logistics

This sector represents a vital support-industry to other sectors which will not be able to perform well without an up-graded transport and logistics sector.

Afghanistan offers new and expanding trade routes. The improvement of its transport infrastructure supports Afghanistan’s trade nexus, both in country and across its borders. It is estimated that 60% of overland transportation comes to or from Pakistan, 30% to or from Iran, and a combined 10% through borders with the Central Asian republics. To the north, in Turkmenistan, Uzbekistan and Tajikistan, goods and commodities flow on main transit routes south through Afghanistan to the ports of Bandar-e ’Abbas and Chah Bahar in Iran, and Gwadar and Karachi in Pakistan. A planned bridge will link Afghanistan and Tajikistan over the Amu Darya (Oxus) River, which carries barge traffic along the borders with Turkmenistan, Uzbekistan and Tajikistan. Within Afghanistan, the main “Ring Road” is connecting Kabul to Kandahar in the South, Herat in the East, and Mazar-e Sharif in the North, hence linking the country’s key commercial centers, while other roads are extending to the border crossings with Iran, Pakistan and other neighboring countries.

Afghanistan’s large and growing market for basic logistics and transportation services presents a ground-floor opportunity for new providers. This opportunity is open to domestic and foreign firms of all sizes and origins. While investment in the sector is increasing, the field is virgin territory for many services. The timing is right to cultivate customers and establish a “first mover” advantage. Early investors in the sector report modest start-up costs and relatively low overheads, and even smaller operators are moving large volumes of freight.

Afghanistan offers a geological-strategic advantage for investors in the Logistics and Transport Sectors. For centuries Afghanistan has been the hub connecting Asia, Europe and the Middle East. Today Afghanistan is ideally situated to again function as a strategic gateway, serving landlocked countries to the north and the Iranian and Pakistani seaports to the south. Afghanistan is potentially the shortest route to the open sea for the Central Asian republics and Russian industrial centers of western Siberia. For Pakistan, Afghanistan offers a primary route for trade with Central Asia. In fact, Afghanistan shares borders with six neighbors – Iran, Turkmenistan, Uzbekistan, Tajikistan, China and Pakistan – and is considered a “land bridge” connecting proximate country markets, as well as potentially large trading partners, such as Iran and India. Afghanistan offers a point of access to an extended regional market of more than 2 billion people, linking the Middle East to Southern, Central and Southeast Asia.

Commercial transport is a high-growth sector in Afghanistan. Among the commercial markets as well as the donor community, demand for transport services is expected to remain strong in the medium and long term. Afghanistan has immediate, almost unlimited demand for both industrial materials and consumer products. Transport volumes for commercial goods, which are almost double that of donor material are expected to rise as Afghanistan’s commercial infrastructure continues to improve. Finally, improving infrastructure and security is resulting in increased transhipment of goods through Afghanistan.

An important demand in the logistics sector is the provision of cold transportation and storage facilities such as cold rooms and refrigerated trucks and containers. Some 20-40% of post-harvest horticulture products are wasted because of poor packaging. In cold storage transportation, there are currently less than 50 refrigerated trucks available around the country.

5. Low-end (labor-intensive) manufacturing

While the agricultural sector presents and is likely to present in the near and mid-term future the most important industry sector, Afghanistan is keen on establishing a low-cost, labor-intensive manufacturing sector which absorbs the many unemployed Afghans, the number of which is likely to increase dramatically with the influx of more returning refugees from neighboring countries and which can not be absorbed by agro-related industries alone. Given the fact that countries like China and India, who have been for decades at the forefront of low-end manufacturing are now moving a step forward into more sophisticated industries which bring rising labor and manufacturing costs, international production industries must be on the continued look-out for low-cost countries to relocate their industries to. Afghanistan can be that new low-end manufacturing base for you.

Industries suitable for investment are likely to be those which can first supply the local market and later on become an export product. That way these industries can help significantly with off-setting Afghanistan’s trade imbalance. All the manufacturing products imported into Afghanistan are shown in a list published by the Afghan statistics office. This indicates that all these products have a market in the country itself.

Suitable industries are further likely to be those from foreign countries which are keen on outsourcing certain parts of their production. In the case of Afghanistan one might think of simple parts which e.g. serve the car industry in Europe and which are expensive to manufacture there.

 

BRIEF COUNTRY PROFILES:  

Name: Islamic Republic of Afghanistan

Location:  Strategically located between Central and Southern Asia to the north-west of Pakistan and east of Iran. Afghanistan also shares borders with China, Tajikistan, Turkmenistan and Uzbekistan.

Capital: Kabul (4.1 million inhabitants)

Number of provinces: 34

Economic centers: 7 (Kabul, Herat, Kandahar, Jalalabad, Khost, Mazar-e-Sharif and Kunduz)

Area:  652,000 square kilometers.

Population: Around 30 million (16, 4 million female / 13, 5 million male) of which 45 % is under 15 years.

Urbanization:  21.7 %.

Rural population: 78.3 % 

Official languages: Pashto and Dari (Afghan Persian)

Natural resources: Energy Minerals such as oil, natural gas and coal; metallic and non-precious minerals such as lead, cement-grade limestone, gemstones, copper, iron, gold, salt, and industrial minerals; as well as a variety of precious and semiprecious stones.

Industries: Mainly small-scale production  
 

Political environment and government priorities 

After years of war Afghanistan is finally open for business. Following the election of H.E. President Hamid Karzai in October 2004 Afghanistan’s first Parliament for more than 30 years held its inaugural session in Kabul in December 2005. Half way through its first year in existence Parliament has approved a fresh line up of Supreme Court justices – a group of professionals and reformers that includes several of Afghanistan’s finest legal minds. The establishment of this court represents a distinct change from the judiciary that has been in place since the collapse of the Taliban and for the first time in its history, Afghanistan is now on its way to have a real system of checks and balances.  

The Afghan Government recognizes that sustained growth of the private sector based on productive investment is an essential prerequisite for economic growth and poverty reduction. The Government recognizes that in order to reach the goals set forth in the National Development Strategy of providing employment opportunities and generate financial resources the private sector plays a crucial role. Afghanistan has already made significant progress in achieving macroeconomic stability and small to medium scale private sector activities have witnessed growth. For a long time activities have, with the exception of the telecommunications industry, predominantly been driven by the international reconstruction effort and donor money because the private sector has been reluctant to undertake medium to long-term productive investments.  

This tendency is however changing and Afghanistan has started to see bigger companies such as Coca-Cola for instance who has opened up a bottling plant adjacent to AISA’s Bagrami Industrial Park next to Kabul; Siemens who is rehabilitating dams; Serena Hotels who has opened Kabul's first five-star hotel; as well as the opening of 14 private banks. In total 15,877 private companies have registered through AISA of which 1,313 are foreign, yielding a total of USD 5.5 billion  worth of private investments. The biggest investment today, however, will be conducted by the China Metallurgical Group Corporation (MCC) in Aynak copper mine. Their total investment in the mine development, a power plant of 400 megawatts and a railway connecting central Asia to Pakistan will be about seven billion dollars over the next five years.  

The President and the Afghan Government both have a strong vision of reform and state building and is working hard towards developing an attractive environment for private investments as well as an effective, honest and transparent public sector. Their commitment to Private Capital Investments is clearly illustrated in Article 10 in the Afghan Constitution: “The State encourages and protects private capital investments and enterprises based on the market economy and guarantees their protection in accordance with the provisions of law.” (Article 10, Afghan Constitution). In practice AISA has been established to streamline the registering process and to offer support for investors on the ground resulting in Afghanistan ranking as number 16th among 145 countries for ease of opening an enterprise according to the World Bank. 

As a result Afghanistan is starting to see extensive both international and domestic private investments including prominent international companies.

(Source: Afghanistan Investment Support Agency "AISA")